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November 1, 2013

You’re Outta Here: Big Jump in Advisors Barred by States

Switching of advisors from federal to state registration contributed to the boost in actions

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Suitability and Fiduciary Duty
Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.

Agency and Principal Transactions
In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.

The number of advisors barred by state securities regulators jumped significantly in 2012, with 3,564 licenses being withdrawn — a 27% increase over the 2,796 withdrawn in 2011—and 736 licenses were denied, revoked, suspended or conditioned.

The increase is attributable “in part” to the completion of the switching of a 2,100 advisors from federal to state registration as mandated by the Dodd-Frank Act, according to the North American Securities Administrators Association’s annual enforcement survey.

The report is based on the results of a survey of NASAA members during spring 2013. This year, 49 of 51 U.S. state and district regulators responded to the survey.

Andrea Seidt, NASAA president and Ohio securities commissioner, said in releasing the data that “closer scrutiny of licensing applications resulted in a noticeable increase in the number of licensing withdrawals in the past year." They survey "shows several important trends in investor protection and securities regulation, including continued investor reliance on state regulators to address both traditional areas of securities fraud and emerging issues.”

NASAA noted the “marked increase” in interagency coordinationduring the 2012 reporting period, with 770 outgoing referralsfrom state securities regulators to other regulators and law enforcement agencies and 604 incoming referralsto state securities regulators from other agencies.